Throwing More Money At The Problem

Hank Paulson's next plan? Use the UberBailout to directly recapitalize banks.

The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

Using authority granted to it by last week's $700 billion market rescue legislation, Treasury would get common or preferred shares in the banks it capitalizes, the source told Reuters on Thursday. The government does not intend to seek seats on companies' board of directors in the voluntary capitalization program.

White House spokeswoman Dana Perino said later on Thursday that Paulson is "actively considering" capital injections into troubled U.S. banks.

"Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," she said.

A Treasury spokesperson declined to comment in detail but said: "Treasury has broad, flexible authorities under the financial rescue legislation to buy assets, provide guarantees and inject capital and intends to consider all of them."

If the U.S. Treasury does inject capital into banks, it would be following the playbook of the British government, which on Wednesday pledged up to $87 billion to shore up banks' capital in exchange for preference shares.

The source familiar with Paulson's thinking said Treasury was working "extremely fast" to put together a capital injection plan.

This plan is basically the nationalization of the bad players in the financial sector. It's come to this. The government will end up owning shares of banks. In some cases these may be majority shares of banks, giving the government de facto ownership of banks to keep them alive long enough to be properly disposed of. The slow death of America's financial sector is at hand. Paulson is seeking an orderly death, not a chaotic one that takes down other sectors of the economy with it.

As it is, he may be too late.

Keep in mind the end of the month is a mere days before the election, too. Political implications will keep the bulk of this until after November 4th, then the undertakers will be called in to cart off hundreds if not thousands of banks to their eventual resting place over the next several months and years.

It will be the next President's problem.